Jefferies Is a Long-Term Bargain

NEW YORK ( TheStreet) - Shares of Jefferies Group ( JEF) look like a bargain for long-term investors.

Shares of the New York investment company dropped 18% last week, closing at $12.07 on Friday, in the wake of the MF Global (MF) debacle. The shares were down 54% year to date. With the shares swinging back and forth as much as 20% in a day, short-term traders could make a killing if they guess correctly.

For the long term, with the shares trading at low multiples after pulling back so much this year and with Jefferies management team showing it knows how to handle market hysteria, the stock looks like a winner.

Since MF Global filed for bankruptcy last Monday, Jefferies has put out several releases to address the media panic over the company's exposure to MF Global and to European sovereign debt:

Last Monday, Jefferies said that its exposure to MF Global totaled "less than $9 million in marked-to-market positions," resulting from "facilitating client orders as part of normal-course market making."

On Tuesday, the company said it has "no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece, and Spain," and that when it "from time to time takes positions in such debt," the positions are marked to market on a daily basis.

On Thursday, Jefferies responded to some large European sovereign debt exposure positions being bandied about in the media, by explaining that net exposure was minimal, since a "long inventory of $2.684 billion" was mostly offset by "short positions in such sovereign debt of $2.545 billion as well as offsetting positions in futures instruments." The company said that net exposure to Portugal, Ireland, Italy, Greece and Spain, was a "combined net short exposure of approximately $38 million equals approximately 1% of Jefferies' shareholders' equity."

With the first statement on Thursday still not quelling the uproar, the company patiently explained later in the day that its entire net short sovereign position was entirely in securities, and it had "no credit-default swaps hedging its sovereign debt positions," which were "short-term trading positions that turn over approximately three to four times per week."

On Friday, Jefferies CEO Richard Handler said in yet another press release that the company had decided that "the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed," and that at day-end, the company would disclose "CUSIP-level holdings in the securities" of the five European countries in question. In the same release, Jefferies illustrated the short-term nature of its sovereign trading positions, saying its net exposure to the sovereign debt of the five European countries was a $9 million short position.

Then on Monday, Jefferies announced that it had reduced its "sovereign securities of the nations of Portugal, Italy, Ireland, Greece, and Spain," by an aggregate of "approximately $1.1 billion long and $1.1 billion short," or 49.5%, resulting in "no meaningful profit or loss on today's trading activity or our remaining positions." The end result was a smaller trading book and net exposure of "$59 million, or 1.7% of shareholder equity, with negligible market or credit risk."

Handler explained on Monday that the company had undertaken the "reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book," and would "now resume our normal market-making activities and serve our clients around the world."

That's it. That's all he said. In addressing investor and media concerns on an almost daily basis, the company and its CEO have been unusually candid, while also keeping comments to the bare minimum. This would seem to be a textbook case on crisis management for a financial services company.

Jefferies filed its fiscal third-quarter 10-Q report with the Securities and Exchange Commission Monday, saying it had $3.49 in total stockholders' equity as of Aug. 31, increasing from $2.81 billion as of Dec. 31.

At Friday's close, shares of Jefferies were trading for 0.9 times the company's reported adjusted tangible book value of $13.18 a share, as of Aug. 31. The shares traded for 8.1 times the consensus 2012 earnings estimate of $1.49 a share, among analysts polled by Thomson Reuters.

KBW analyst Lauren Smith on Thursday reiterated her outperform or buy rating on the shares, saying that "JEF has been unjustly punished by concerns over the recent MF Global bankruptcy and a credit rating downgrade," and that "when the dust settles, patient investors are likely to be rewarded."

The analyst said KBW continues "to believe that JEF represents a high-quality franchise and it has been unjustifiably punished in recent days."

Smith did lower her 12-month price target for Jefferies' shares to $17 from $22, as "the continued overhang of increased regulatory oversight and the speculation for the potential negative impact on EPS could limit a recovery in the stock price." The analyst's $17 target represents a price-to-tangible-book ratio of 1.22, which is "a 34% discount to the firm's 3-yr. average".

Smith also said that Jefferies' capital ratios are "now comparable" to Goldman Sachs ( GS) and Morgan Stanley ( MS), as those companies "have driven ratios lower functioning as bank holding companies for some time now."

Jefferies Group's handling of last week's events, the company's strong capital position and growing importance as a dealer in the U.S. and Europe, and Handler's deft maneuvering over the last week, argue that the company is a survivor. The company's low trading multiples make the shares attractive for investors who can commit for several years.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.